Malaysian PM's critics unbowed despite anti-graft agency support

KUALA LUMPUR (Reuters) - Malaysian opposition parties and activists kept up pressure on Prime Minister Najib Razak on Tuesday, undeterred by an anti-corruption agency statement apparently clearing him of receiving nearly $700 million from the debt-laden state fund 1MDB.

A senior member of Najib's party also broke ranks over the scandal, suggesting that the prime minister's moves to oust dissenters from positions of power and effectively delay a probe into the fund had failed to put his government out of danger.

On Monday, the Anti-Corruption Commission acknowledged that 2.6 billion ringgit ($675.15 million) was transferred into Najib's private accounts but said the money was a donation, not from 1Malaysia Development Berhad [TERRN.UL].

"Malaysians and the world are watching the country being seized by a madness where the government is warring against itself," said Lim Kit Siang, parliamentary leader from the Democratic Action Party (DAP).

"Such madness must stop and Malaysians must face up to one and only one issue – for the Prime Minister Najib Razak to convince Malaysians and the world of his innocence and moral authority to continue to lead Malaysia!"

The Wall Street Journal reported in July that investigators looking into allegations of graft and financial mismanagement in 1MDB found that nearly $700 million was deposited into Najib's accounts. Reuters has not verified the report.

The prime minister has denied taking any money for personal gain, saying the allegations are part of a malicious campaign to force him from office. 1MDB has denied transferring funds to Najib and an interim government report found nothing suspicious.

Najib sacked his deputy, Muhyiddin Yassin, and replaced the attorney general last week, in what was seen as a bid to stifle questions over the mounting scandal.

He also suspended two newspapers and a news portal that has been reporting on the graft scandal. Protesters were detained under the Sedition Act, and some opposition leaders have been rapped with travel bans.

THREAT TO RULING PARTY

Human Rights Watch called on U.S. Secretary of State John Kerry, who arrives in Kuala Lumpur on Wednesday for ASEAN meetings, to raise the topic with Najib.

"Secretary of State Kerry should publicly tell Prime Minister Najib that peaceful demonstrations are not detrimental to parliamentary democracy, speaking one's mind is not sedition, and stymieing investigations into corruption will destroy a democracy, not save it," Phil Robertson of Human Rights Watch said in a statement.

The furore over 1MDB has brought Najib's biggest crisis since he took office in 2009 and could threaten the grip that his United Malays National Organisation (UMNO) has had on politics since independence in 1957.

Most UMNO lawmakers have rallied behind Najib, but on Tuesday party colleague and chief minister of the state of Johor Mohamed Khaled Nordin said UMNO could not keep quiet if "corruption becomes a culture or trust is betrayed".

"UMNO cannot keep quiet when the party no longer champions the cause of Malays but is instead used to defend a few under the name of loyalty or discipline in adhering to leaders," he wrote on his Facebook page.

Najib's biggest critic, influential former Prime Minister Mahathir Mohamad, also weighed in, questioning why a donation was made into his successor's personal accounts.

"Not even a cent of donated funds for election was deposited into my account," Mahathir said in a blog post.

Public outrage against the government is also growing.

Electoral reform group Bersih has called a mass rally in three cities for Aug 28-29. Its last demonstration, for electoral reform in 2012, was broken up by police.

Rising costs and a weak currency are adding to the downbeat sentiment. The ringgit is Asia's worst performer this year, falling more than 10 percent against the dollar, weighed down by the political tension over 1MDB.

(Additional reporting by Vidya Ranganathan; Editing by John Chalmers and Nick Macfie)